Settlements Abound as Few Look to 'Test the Waters' on Force Majeure Litigation
"I'm seeing that, in general, resorting to the courts for relief of obligations is not working very well. I don't anticipate that it will," said attorney Scott Lippert.
Since the pandemic began, lawyers have been using the coronavirus to justify nonpayment of rent, construction delays and even termination of labor contracts.
But the prospect of litigating a contract cancellation based on force majeure is still so fraught with peril that many breach-of-contract disputes end in an amicable resolution.
Case law on canceling contracts based on a pandemic is virtually nonexistent, although a handful of courts have issued rulings. And lawyers say fear of the unknown is prompting many such disagreements to end in settlements.
“The uncertainty of going to a courtroom makes everybody leery of following that path. I don’t think anybody wants to test the waters. Even if you think you have the grounds to terminate, who knows what a jury is going to do?” says Mitchell Taraschi of Connell Foley in Roseland, New Jersey, who has seen force majeure raised frequently in construction projects during the pandemic. “I’m surprised, given all the problems during the pandemic, that most of the problems have been worked out. Everybody has tried to work together.”
Laura Holm’s strategy
Laura Holm of Fox Rothschild in West Palm Beach, Florida, succeeded in canceling three big event contracts for her client just as the pandemic was getting underway in spring 2020.
The client was under contract to hold a two-day event in Manhattan in July 2020, with attendees flying in from all over the world. Once the decision was made that the health risks from holding the event were too great, Holm set about to convince a lead sponsor, a hotel and an event space to terminate their contracts. Dealing with the three vendors was sensitive because they held large deposits of the client’s funds.
The three contracts, which Holm negotiated, had widely differing terms.
The lead sponsor’s contract stated that any delay or failure due to an act of God, governmental act, epidemic or similar circumstances would be remedied as soon as possible.
The hotel contract, meanwhile, provided that unanticipated events outside the party’s control, such as acts of God, government regulations or 50% of attendees being unable to attend would constitute force majeure and the deposit would be returned.
And the contract for the event space said events occurring outside a party’s control, including strikes, accidents, government orders, acts of God and terrorism would exclude either party from performance.
In the second and third contracts, Holm added a provision that her client’s deposits would be returned if there were a force majeure event.
For the parties to those contracts, settling rather than putting up a fight came down to a good business decision.
“Most companies want to keep their customers coming back,” Holm said.
Varying interpretations
State courts vary widely in how they interpret force majeure clauses, Holm said.
“The states have very different standards. Some, like New York, construe it very narrowly. In other states they’ll give the plaintiff the benefit of the doubt how the contract should be interpreted.”
For Joshua Grimes of Grimes Law Office in Philadelphia, whose practice focuses on meetings and conventions, much of 2020 was spent untangling disputes over large gatherings that were canceled due to the coronavirus.
But generally both sides acknowledged that the meetings could not happen, he said. International travel was restricted, and many doctors and other health care professionals were under no-travel orders. In addition, hotels and convention centers were subject to strict limits on large gatherings.
Still, most disputes over canceled events were settled because of the uncertainty of litigation and because hotels are adverse to the negative attention that litigation might bring, he said.
Connell Foley’s Taraschi said the pandemic has prompted materials shortages that have caused 18-month construction projects to last for 24 months.
Lawyers have also cited the pandemic as the reason their clients aren’t completing jobs on time, but to litigate such disputes would place clients at the mercy of the badly backlogged court systems, he said.
“I think everybody understands the position everybody is in, trying to move forward and get the project done,” Taraschi said. “It’s been remarkable how most parties have tried to work it out.”
‘Sensible, extra-judicial compromises’
Ronald Chen, who teaches first-year contract law at Rutgers Law School in Newark, said there are no real experts on pandemic-related law, and that “like so much of the world, the law is improvising in dealing with a situation no one anticipated.”
Chen said that of the handful of coronavirus-related commercial real estate cases that have gotten to court, judges have taken a dim view of allowing the tenant out of the rent obligation based on the pandemic.
He cites a ruling last month from a New York judge who refused to cancel a commercial lease for a Hugo Boss retail store in Manhattan.
The judge in that case found that a clause allowing termination of the lease based on a “casualty event” did not encompass the pandemic since the term “casualty” denotes physical damage to the premises. The judge said the lease provided the parties certain accommodations if their ability to carry out their respective obligations is impacted by government restrictions, but termination of the lease or abatement of rent are not provided in the contract.
The ruling, in Hugo Boss Retail v. A/R Retail, “summarizes a lot of the recent attempts by big name tenants to get out of the retail store rent obligations, and very narrowly construes force majeure clauses in the contract itself (which of course never contemplated something like COVID),” Chen said. “My speculation is that courts would be reluctant to use broad common law doctrines to relieve sophisticated contractual parties of their contractual obligations due to COVID-19, lest it cause the collapse of the real estate industry and have other unintended consequences.”
But outside the courthouse, Chen said, he suspects landlords and tenants are coming to “sensible, extra-judicial compromises, since there is no point in a landlord evicting a client when there is no replacement available, and a compromise is better than a hollow recovery against a judgment-proof defendant.”
Scott Lippert, a commercial real estate lawyer at Pashman Stein Walder Hayden in Hackensack, New Jersey, likewise said courts are presumed to be hostile to force majeure-based efforts to cancel contracts, so the focus is on settling.
He cited an Appellate Division ruling from last week, Bussel Realty v. Franco, which said disruption of a real estate company’s income, caused by the COVID-19 pandemic, was not cause for relief from its obligation to make payments under the settlement of a prior lawsuit.
“I’m seeing that, in general, resorting to the courts for relief of obligations is not working very well. I don’t anticipate that it will,” Lippert said.
Lippert said he was negotiating force majeure clauses in newly drafted contracts that reflect experiences of the coronavirus. But he said some clients feel the pandemic is over, and that it is “not likely to recur as badly as it did before.”
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